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ICAEW have worked with the Prudential Regulation Authority to produce an illustrative opinion for step 2 of the Solvency II balance sheet review exercise as well as some potential considerations for step 1 reporting.

Further to the PRA’s update of 9 February 2015, ICAEW is now able to make available an illustrative auditors’ report that audit firms may consider using for step 2 of the PRA’s review exercise. Step 2 comprises an audit of the SII balance sheet, own funds and technical provisions of the insurer and/or its insurance group, as requested by the PRA. This report assumes that insurers will use the relevant preparatory phase reporting templates which are referred to in the illustrative auditors’ report (the “Forms”) for the purposes of this exercise.

Further considerations:

Basis of preparation

Set out below are some potential considerations regarding the depth to which an insurer’s basis of preparation should be prepared, as this will accompany the auditors’ report. This may be of assistance as insurers/insurance groups prepare their step 1 basis of preparation for the ‘review and recommend’ exercise due to be completed by the end of March.

It is not practicable to provide an indication of the length and detail of the basis of preparation document required, as this will depend on the complexity of the insurer and its group structure.

For step 1, the independent reviewer/auditor will need to understand how insurers have implemented the Solvency II requirements, taking account of both the Directive and Delegated Regulations, as well as latest available versions of implementing technical standards and EIOPA guidance (which may be draft) and any relevant PRA issued guidance.

For step 2, the basis of preparation document represents the document which will be referred to in giving “the properly prepared in accordance with” audit opinion. Together with the EIOPA issued LOG files, this establishes the basis applied by insurers in completing the Forms. Accordingly, the basis of preparation needs to be sufficiently detailed so that it is clear how the rules have been applied in respect of the insurer’s/insurance group’s particular transactions and state of affairs.

ICAEW therefore anticipates that the basis of preparation will need to be at a greater depth than typical accounting policy notes in the financial statements. Reviewers and/or auditors will need to understand the basis behind key assumptions made, as well as the approach adopted to prepare the Solvency II balance sheet, own funds and technical provisions.

ICAEW confirmed with the PRA that cross-references can be included in the basis of preparation to detailed supporting papers to prevent the basis of preparation becoming too long, provided these supporting papers are made available to the PRA on request when it performs its own review of the step 1 submissions.

ICAEW further confirmed that references in the PRA’s February update to “the narrative information on valuation described in Guidelines 29 to 33 of EIOPA’s preparatory guidelines on submission of information to national competent authorities” is not intended to bring the narrative reporting into scope of the phase 2 audit report. The intention of this reference was to provide guidance to insurers regarding the depth of detail the PRA expects to see within the basis of preparation (or cross-referenced documents). It was not the PRA’s intent that the disclosures relating to the material differences between Solvency II and financial statements numbers would be required to be audited.

Auditors’ report

The format of the illustrative auditors’ report assumes that where group information has been requested by the PRA, the insurer will be the responsible party for submitting this to the PRA, as is currently the case with submissions of the group capital adequacy return. ICAEW confirmed with the PRA that it only requires the group information to be submitted once, so insurers can follow the current group filing approach whereby one insurer submits it on behalf of every insurer in the group, but must share this information with the other UK insurers within the group.

Other clarifications

Three further clarifications that may be helpful to insurers:

ICAEW understands that the PRA may wish insurers to provide an audit trail from the step 1 to the step 2 basis of preparation. Such changes could, for example, reflect recommendations made under the step 1 review, changes in approval assumptions, new or modified requirements since the step 1 basis of preparation was prepared (for example revised EIOPA or new PRA guidance). Any such requests by the PRA will be made outside the step 1 and step 2 reporting process exercise itself.

The link to the Forms to be used for this exercise is included in a footnote to the illustrative auditors’ report. In its update of 9 February 2015, the PRA confirmed that ‘greyed out’ cells are in scope for the purposes of this PRA exercise, notwithstanding that they are out of scope for the preparatory phase reporting required under the EIOPA guidelines.

Where an insurer/insurance group prepares the Forms supporting the Step 2 submission on the assumption that approval to use the technical provisions transitional measure will be granted, auditors should note that as the starting point for determining the amount of the transitional deduction will most likely be based on the unaudited individual capital assessment, the starting position used in the calculation of the transitional deduction component of technical provisions is excluded from the scope of the step 2 assurance opinion.